Wal-Mart income, comp sales down in the first fiscal quarter (Updated)

Officials with Wal-Mart Stores Inc. said bad weather and a currency exchange rate were partially to blame for a comparable decline in net income in the first fiscal quarter and total revenue that was just 0.8% higher than the same quarter in 2013.

The Bentonville-based retailer reported per share net income for the first fiscal quarter of $1.11, below the consensus estimate of $1.15. The company earned $1.10 per share from continuing operations. Total revenue of $114.96 billion was up slightly over the $114.07 billion in first quarter of 2013 and was below the consensus estimate of $116.27 billion.

"Walmart's first quarter net sales increased 0.8% over last year. Like other retailers in the United States, the unseasonably cold and disruptive weather negatively impacted U.S. sales and drove operating expenses higher than expected," Wal-Mart President and CEO Doug McMillon said in the earnings report released early Thursday (May 15).

Charles Holley, chief financial officer, said weather dinged net earnings some 3 cents per share in the quarter. Weather-related expenses included snow removal costs and the hiring of third party logistics services as a result of the major log jam in the supply chain from manufacturers to the distribution centers.

Bill Simon, CEO of Walmart U.S. said, the supply chain backlog created during several winter storms was the worst he has seen during his time at Wal-Mart. He said third party logistics were required to get the stores restocked quickly as there were delays from manufacturers. He said the 200 stores temporarily closed added to the weaker numbers.

The company said revenue took a $1.6 billion hit because of a currency exchange rate fluctuation. The company also paid $1.5 billion in the quarter to acquire “substantially all” of the outstanding shares in Walmart Chile.

Consolidated net income attributable to Wal-Mart was $3.6 billion, a decrease of 5%, related to higher core costs. Wal-Mart said it spent $53 million in compliance costs related to the Foreign Corrupt Practices Act. Approximately $34 million of that was linked to ongoing inquiries and investigations, and approximately $19 million was related to the retailer’s global compliance program and organizational enhancements.

WALMART U.S.
The flagship sector, Walmart U.S. continues to feel pressure from weaker U.S. comp traffic, down 1.4% in the quarter, despite a 1.3% uptick in the average shopper ticket. This marks the fifth consecutive quarter of negative to flat comparable sales, the benchmark metric used to measure retail performance.

“We feel good about the underlying business and are pleased with the performance of Neighborhood Markets which recorded comp sales of roughly 5% and traffic increases of 4% in quarter,” Simon said during a media call. "We saw strength across food and health & wellness, and we're particularly pleased with our overall traffic trend. April marked the 46th consecutive month of positive comps for Neighborhood Market.”

He said as inflation has risen in meat and dairy, Walmart has been able to hold prices steady which has helped it gain marketshare in these categories. Simon said ticket averages are rising at its supercenter format, while traffic is heavier at the smaller formats.

Wal-Mart plans to offer its gas savings rollback program next month, an initiative that typically runs throughout the summer for customers who pay for their fuel purchases with a Walmart giftcard or store credit card.

Going forward, Simon said the retailer will continue working to bring its e-commerce and physical stores into sync to provide a more seamless process for shoppers. The first fully tethered Walmart Express came online in North Carolina this month. Simon said shoppers may now stop to buy fuel at a Neighborhood Market and pick up a bicycle ordered online a hour earlier.

He is also excited about the new online grocery format coming to Bentonville. Simon explained that this concept depot is similar to other formats in its ASDA banner in the U.K., but it’s different in that the Bentonville center will be a wholesale warehouse where items are picked and packaged on site. He said orders placed online can be picked up an hour or 90 minutes later. Construction is already underway on this new format which is slated to open later this year.

A bright spot in the earnings came from the retailer’s e-commerce segment which grew sales by 27% in the quarter. On a comparable basis online sales rose 0.3% from a year ago.

Walmart said its seeing double-digit sales growth from nearly all of its e-commerce and mobile commerce businesses around the world. Brazil e-commerce and Yihaodian in China continue to experience strong demand.

"We have the opportunity to create transformative growth through stronger e-commerce capabilities," McMillon said in the statement. "Our investments are focused on improving customer experience and fulfillment capacity. We're working to deliver a relevant, personalized and seamless customer experience across all channels to further grow sales."

INTERNATIONAL IMPROVEMENT
Walmart’s diverse international division has been working to rein in operating costs over the past few quarters. In the first quarter Walmart International reported total revenue of $32.424 billion, down 1.4% including currency fluctuations. On a constant currency basis revenue was $34 billion, up 3.4% from a year ago. Operating income in the segment rose 3.4% to $1.202 billion.

“Our teams are executing key strategic initiatives and driving sales growth, while serving customers wherever and however they want to shop," said David Cheesewright, president and CEO of Walmart International. "We delivered on our commitment to grow operating income at a rate greater than sales, both reported and excluding currency."

The segment’s total results were negatively impacted by restructuring taking place in China and Brazil, two of its larger international markets.

SAM’S DISAPPOINTS
Once the shining star of the Wal-Mart portfolio, Sam’s Club has lost some of its luster and reported comp sales down 0.2%, while the average ticket down 0.3%. Net sales were $13.891 billion at Sam’s Club (including fuel), up just 0.1%.

“The fiscal year started with several challenges for our core member, resulting in one of our more difficult quarters. The combination of severe weather and the reduction of public assistance represented an approximate 90 basis point impact to comp sales,” said Rosalind Brewer CEO of Sam’s Club.

While traffic and average ticket sales declined in the quarter, membership and other income grew 10.5%. This jump was related to the fee increase taken a year ago. Sam’s said new member signups were softer to start fiscal 2015.

To spur more spending Sam’s is rolling out a cash back rewards initiative next month. This new benefit provides $10 for every $500 spent on qualifying purchases. All members will continue to receive Instant Savings offers; however, the benefit of cash rewards will be exclusively for Plus members, the company said.

This cash rewards plan has been tested in the Texas market with positive results. It is now being rolled out nationwide.

FORWARD LOOK
The company expects second fiscal quarter financials to be similar to those in the same quarter of 2013.

"We expect second quarter fiscal year 2015 diluted earnings per share from continuing operations to be between $1.15 and $1.25. This compares to $1.24 last year," Holley said. "Our guidance assumes incremental investments in e-commerce, headwinds from higher health care costs in the U.S. and increased investments in Sam's Club membership programs. We continue to expect our full-year effective tax rate to range between 32 and 34 percent. We expect our effective tax rate to be at the high end of this guidance for the second quarter."

Jan Kniffen, CEO of J. Rogers Kniffen Worldwide CEO, said Wall Street knows the first quarter was bad, but what it is looking for from retailers reporting earnings today and tomorrow is that the first six weeks of this quarter has been better and they are expecting a strong half of the year.

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That is not what Wal-Mart or Kohl’s projected in their Thursday announcements, with both gave cautious guidance. Simon said their shopper base is still struggling to overcome stagnant wages.

Street.com analyst Jim Cramer said it’s not that Wal-Mart has lost its way, and it’s also not that Wal-Mart is merely a play on the low-end consumer woes like food stamps and government stimulus, but it’s also a realization that consumers are shopping elsewhere.

Negative traffic despite the company's investments is “very reflective in how people are now shopping and the company not being able to fully play in that trend,” said Brian Sozzi, CEO of Bellus Capital Advisors. He also notes that five consecutive “earnings warning” is an indication Wal-Mart continues to face “deep” issues.

Wal-Mart shares fell 2.5% in the morning session trading at $76.83, down $1.90 on the day. During the past 52 weeks the share price has ranged from an $81.37 high to a $71.51 low.

Seeking Alpha contributor Brian Gilmartin notes that Wal-Mart is fairly valued at $80, given its ability to generate cash which it’s returning to shareholders in dividends and stock buybacks.

He said Wal-Mart’s long-term challenge is to grow revenues at something more than "low single-digit" percentages in an environment where GDP grows 2% (maybe) per year, and inflation persists at 1% to 1.2% per year.